- CFA Exams
- CFA Exam: Level I 2021
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 25. Inventories
- Subject 2. Inventory Valuation Methods

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**CFA Practice Question**

When calculating ending inventory using the average cost method, which of the following is CORRECT?

B. The denominator is the number of units remaining.

C. The denominator is the number of units purchased.

A. The numerator is the beginning inventory balance plus purchases.

B. The denominator is the number of units remaining.

C. The denominator is the number of units purchased.

Correct Answer: A

The average cost is calculated by taking the beginning inventory balance plus purchases divided by the total number of units in inventory, which is the number in the beginning balance plus the number purchased.

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**User Contributed Comments**
7

User |
Comment |
---|---|

kalps |
AVCO = Opening stock + purchases / opening units + units purchased |

db28luke |
Couldn't the answer also be C? Opening units + units purchased = number of units remaining |

cbb1 |
No, the denominator is the total units for available for sale and not the number of units remaining. |

Oarona |
cbb1 is right. C can only be right if you assume that the beginning inventory is zero. |

swisha |
Beg. Inv. + Purchases / units available for sale = Average cost .....then you multiply the Average cost by the ending inventory count to get the Ending Inventory.....answer A is only the FIRST step in calculating the ending inventory balance... |

Bududeen |
i think db28luke should have said B; number of units remaining...is the denominator. if sales happened during the year then B is also correct... by extension..opening inv + purchases = remaining units...the question is ambiguous...both A and B are correct |

Bududeen |
infact..a close look would reveal A to be somehow less likely or less correct with respect to B...as the question was talking about ending inventory...implying opening inv + purchases - sales ... thus remaining units in the denominator...A would only be correct if there were no sales |